Savvy investors focused on fix-and-flip properties know that estimating rehab costs is perhaps the most critical and challenging part of the deal. If your estimate to fix-and-flip the property is too high, you will likely lose the deal to another investor. If you underestimate, your potential profit will adversely be affected.
The better you assess rehab costs, the more successful you will be. Let us look at some key aspects to consider as you estimate rehab costs that will help ensure a strong ROI:
- Know your buyer and neighborhood: Study the comparables – recently sold properties in the neighborhood similar to the property you are interested in – so you have a clear idea for how much you should be able to sell the house. If the property is in an upmarket neighborhood, potential buyers will want higher end rehabs. If it is in a med-low income neighborhood, you will need to spend less on the total project.
- Spend time in the property and note problems: With an idea of how you want the property to look post flip, have a checklist in hand as you walk through the home. Take notes of all issues or problems with the home that you will want to address. If you need help, take your contractor with you. Taking photos and videos is also a great tip.
- Begin your estimate: Sort your check list into categories (Exterior, Foundation, Interior, etc) and include other line items such as contractors. Either from experience, with the aid of a contractor, or by searching the web, assign costs to the items in each category so you come up with total costs for each category. Now you know your estimated rehab cost.
It is important to never lose sight of your after-repair value (ARV), the value of the home post fix. Your ARV will not only help you determine your rehab budget, but also how much you are willing to pay initially for the property. Most experts agree that to profit from the project, you should bid no more than 70% of the price for which you believe you can sell the property. But remember to factor in what it will cost you to fix up the property.
There is no doubt there is much money to be made in the fix-and-flip market. And lots of factors will determine whether or not you are successful. Contact the RLG team today to schedule some time to discuss how RLG’s vast experience in the sector can help guide you to success.